AMENDED 10-Q MARCH 31, 1996
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-11551
EXECUTONE Information Systems, Inc.
(Exact name of registrant as specified in its charter)
Virginia 86-0449210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
478 Wheelers Farms Road, Milford, Connecticut 06460
(Address of principal executive offices) (Zip Code)
(203) 876-7600
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of registrant's Common Stock,
$.01 par value per share, as of April 30, 1996 was 51,906,168.
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INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION 15
SIGNATURES 16
EXHIBIT 11. STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS 17
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands, except for share amounts) 1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,278 $ 8,092
Accounts receivable, net of
allowance of $1,366 and $1,715 43,291 48,531
Inventories 35,399 32,765
Prepaid expenses and other current assets 2,241 5,290
Total Current Assets 87,209 94,678
PROPERTY AND EQUIPMENT, net 16,522 18,462
INTANGIBLE ASSETS, net 19,990 20,022
DEFERRED TAXES 33,327 29,616
OTHER ASSETS 4,497 5,066
$ 161,545 $ 167,844
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 938 $ 932
Accounts payable 30,824 30,676
Accrued payroll and related costs 8,558 6,870
Accrued liabilities 9,647 11,851
Deferred revenue and customer deposits 20,127 19,781
Total Current Liabilities 70,094 70,110
LONG-TERM DEBT 28,879 29,829
LONG-TERM DEFERRED REVENUE 2,780 2,805
TOTAL LIABILITIES 101,753 102,744
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 51,865,163 and 51,658,492 issued
and outstanding 519 517
Preferred stock: $.01 par value; Cumulative
Convertible Preferred Stock (Series A),
250,000 shares authorized,issued and outstanding;
Cumulative Contingently Convertible Preferred
Stock (Series B), 100,000 shares
authorized, issued and outstanding 7,300 7,300
Additional paid-in capital 79,716 79,668
Retained earnings(deficit)(since July 1, 1988) (27,743) (22,385)
Total Stockholders' Equity 59,792 65,100
$ 161,545 $ 167,844
The accompanying notes are an integral part of these consolidated
balance sheets.
</TABLE>
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3
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
(In thousands, except for per share amounts) March 31,
1996 1995
<S> <C> <C>
REVENUES $ 66,966 $ 70,808
COST OF REVENUES 40,446 42,459
Gross Profit 26,520 28,349
OPERATING EXPENSES:
Product development and engineering 3,764 3,707
Selling, general and administrative 26,256 23,804
30,020 27,511
OPERATING INCOME (LOSS) (3,500) 838
INTEREST EXPENSE (808) (915)
LOSS ON SALE OF BUSINESSES (Note G) (4,877) ---
OTHER INCOME (EXPENSE) 216 277
INCOME (LOSS) BEFORE INCOME TAXES (8,969) 200
PROVISION (BENEFIT) FOR INCOME TAXES:
Cash 100 100
Noncash (Note C) (3,711) (20)
(3,611) 80
NET INCOME (LOSS) $(5,358) $ 120
EARNINGS (LOSS) PER SHARE $ (0.10) $ ---
WEIGHTED AVG. COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 51,853 48,838
The accompanying notes are an integral part of these consolidated
statements.
</TABLE>
4
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<TABLE>
<CAPTION>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
(In thousands) March 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,358) $ 120
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 1,529 1,776
Loss on sale of businesses (Note G) 4,877 ---
Benefit for income taxes not currently payable (3,711) (20)
Noncash expenses, including noncash interest
expense, noncash provision for losses on
accounts receivable and income from equity
investment 276 457
Change in working capital items:
Accounts receivable 3,817 1,070
Inventories (3,722) (4,726)
Accounts payable and accruals 47 (9,572)
Other working capital items 3,036 1,529
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 791 (9,366)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,846) (1,483)
Other, net 235 (140)
NET CASH USED BY INVESTING ACTIVITIES (1,611) (1,623)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under revolving
credit facility (751) 9,633
Repayments of other long-term debt (270) (279)
Repurchase of stock (326) ---
Proceeds from issuance of stock 353 1,070
Other borrowings --- 750
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (994) 11,174
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,814) 185
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 8,092 7,849
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,278 $ 8,034
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
5
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - NATURE OF THE BUSINESS
EXECUTONE Information Systems, Inc. (the "Company") designs,
manufactures, sells, installs, supports and services voice and
data communications systems and provides cost-effective long-
distance telephone service and videoconferencing services. The
Company is also a leading supplier of specialized hospital
communications equipment. Products are sold under the EXECUTONE,
INFOSTAR, IDS, LIFESAVER and INFOSTAR/ILS brand names through a
worldwide network of direct and independent sales and service
offices. The Company is organized into five divisions: Computer
Telephony, Healthcare Communications Systems, Call Center
Management ("CCM"), Videoconferencing Products and Network
Services.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments, which include normal
recurring adjustments, considered necessary for a fair
presentation of the results for the interim periods presented
have been included. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
As of July 1, 1988, an accumulated deficit of approximately $49.7
million was eliminated.
NOTE C - INCOME TAXES
The Company accounts for income taxes in accordance with FAS No.
109, "Accounting for Income Taxes." The deferred tax asset
represents the benefits that are more likely than not to be
realized from the utilization of pre- and post-acquisition tax
benefit carryforwards, which include net operating losses, tax
credits and the excess of tax bases over the fair value of the
net assets of the Company.
For the three-month periods ended March 31, 1996 and 1995, the
Company made cash payments for income taxes of approximately
$9,000 and $44,000, respectively.
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6
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NOTE D - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of
shares of common stock and dilutive common stock equivalents
(which include stock options and warrants) outstanding during the
periods. Common stock equivalents and the convertible debentures
which are antidilutive have been excluded from the computations.
NOTE E - INVENTORIES
Inventories are stated at lower of first-in, first-out ("FIFO")
cost or market and consist of the following at March 31, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
(amounts in thousands) 3/31/96 12/31/95
<S> <C> <C>
Raw Materials $ 5,865 $ 4,783
Finished Goods 29,534 27,982
$ 35,399 $ 32,765
</TABLE>
NOTE F - UNISTAR ACQUISITION
On December 19, 1995, the Company acquired 100% of the common
stock of Unistar Gaming Corporation ("Unistar") for 3.7 million
shares of the Company's common stock and 350,000 shares of newly
issued preferred stock.
The preferred stock consists of 250,000 shares of Cumulative
Convertible Preferred Stock, Series A ("Series A Preferred
Stock") and 100,000 shares of Cumulative Contingently Convertible
Preferred Stock, Series B ("Series B Preferred Stock"). The
Series A Preferred Stock has voting rights equal to one share of
common stock and will earn dividends equal to 18.5% of the
consolidated retained earnings of Unistar as of the end of a
fiscal period, less any dividends paid to the holders of the
Series A Preferred Stock prior to such date. The Series B
Preferred Stock has voting rights equal to one share of common
stock and will earn dividends equal to 31.5% of the consolidated
retained earnings of Unistar as of the end of a fiscal period,
less any dividends paid to the holders of the Series B Preferred
Stock prior to such date. All dividends on Preferred Stock are
payable (i) when and as declared by the Board of Directors, (ii)
upon conversion or redemption of the Series A and Series B
Preferred Stock or (iii) upon liquidation. As of March 31, 1996,
no dividends have accrued to the preferred stockholders. The
Series A and Series B Preferred Stock is redeemable for a total
of 13.3 million shares of common stock (Series A Preferred Stock
for 4.925 million shares and Series B Preferred Stock for 8.375
million shares) at the Company's option. In the event that
Unistar meets certain revenue and profit parameters, the Series A
Preferred Stock is convertible for up to 4.925 million shares of
common stock and the Series B Preferred Stock is contingently
convertible for up to 8.375 million shares of common stock (a
total of an additional 13.3 million shares of common stock).
Shareholder approval is required before any of the Series B
Preferred Stock can be converted or redeemed.
In an attempt to block the NIL, certain states filed letters
under 18 U.S.C. Section 1084 to prevent the long-distance
carriers from providing telephone service to the NIL. The CDA
initiated legal action to compel the long-distance carriers to
provide telephone service to the NIL. The CDA's position is that
7
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the lottery is authorized by the Indian Gaming Regulatory Act
("IGRA") passed by Congress in 1988, that IGRA preempts state and
federal statutes, and that the states lack authority to issue the
Section 1084 notification letters to any carrier. On February
28, 1996, the NIL was ruled lawful by the CDA Tribal Court. The
CDA Tribal Court found that all requirements of IGRA have been
satisfied and that the Section 1084 letters issued by certain
state attorneys general in an effort to interfere with the lawful
operation of the NIL are invalid. In addition, the Court found
that the long-distance carriers cannot refuse to provide the
service requested in the action based upon 18 U.S.C. Section
1084. Any appeal of this ruling must be filed by May 31, 1996.
The Company expects this ruling will be appealed but believes the
CDA's position will be upheld.
NOTE G - SUBSEQUENT EVENTS
On April 9, 1996, the Company entered into an agreement to sell
substantially all of the Direct Sales and Services Group,
including its long-distance reseller business and National
Service Center, for $67.4 million to an acquisition company led
by Bain Capital, Inc. The purchase price will consist of $61.5
million in cash and a $5.9 million note. In addition, the
Company will receive warrants to purchase 8% of the common stock
of the new company, issued as of the closing, for $1.1 million,
exercisable for three years. The sale is expected to close on
May 30, 1996, subject to the buyer's financing and other
conditions. The agreement also provides that the Company and the
buyer will enter into a five-year exclusive distribution
agreement under which the buyer will sell and service the
Company's telephony equipment to those businesses and commercial
locations that require up to 400 telephones.
The sale does not include the Pittsburgh direct sales and service
office, which the Company has separately agreed to sell to one of
its existing independent distributors for approximately $1.3
million in cash and notes. The sale of the Direct Sales and
Service Group (including the separate sale of the Pittsburgh
office) relates primarily to the retail distribution channel of
the Computer Telephony division and includes the entire network
services division. After the sale, the Computer Telephony
division will consist of telephony product sales to independent
distributors, of which the newly-formed Bain company will be the
largest distributor, along with the National Accounts and Federal
Systems marketing groups. The Company will retain its Healthcare
Communications and Call Center Management businesses and the
recently acquired Unistar business.
On April 10, 1996, the Company announced that it had given notice
of its termination of its distribution agreement with GPT Video
Systems due to failures by GPT to deliver properly-functioning
videoconferencing products on a timely basis. The Company is
negotiating an agreement with a third party to sell its
videoconferencing business. Terms of the contract have yet to be
finalized. The Company recorded a pretax reserve for loss of
$3.9 million.
In April 1996, the Company also sold its inmate calling business
for $0.5 million in cash and notes and recorded a pretax loss of
$1.0 million. This business was a part of the Computer Telephony
division. Neither the Pittsburgh direct sales office, the
videoconferencing division, nor the inmate calling business
constituted a material portion of the Company's assets, revenues
or net income prior to the sale.
8
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NOTE H - OTHER MATTERS
For each of the three-month periods ended March 31, 1996 and
1995, the Company made cash payments of approximately $1.2
million for interest expense on indebtedness.
In February 1996, the Company received the proceeds of the $1.8
million note from the sale of the Wisconsin direct sales office
in December 1995.
There were no non-cash financing activities for the three-month
periods ended March 31, 1996 and 1995.
Refer to the Consolidated Statements of Cash Flows for
information on all cash-related operating, investing and
financing activities.
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company develops, markets and supports voice and data
communications systems. Products include telephone systems,
voice mail systems, inbound and outbound call center systems and
healthcare communications systems. Products are sold under the
EXECUTONE, INFOSTAR, IDS, LIFESAVER and INFOSTAR/ILS brand names.
The Company's revenues are primarily derived from sales of its
products and services through a worldwide network of direct sales
and service offices and independent distributors. The Company's
end-user revenues are derived from two primary sources: (1)
sales of systems to new customers, which include sales of
application-specific software options, and (2) servicing the end-
user base through the upgrade, expansion, enhancement (which
includes sales of application-specific software options) and
maintenance of previously installed systems, as well as revenues
from the INFOSTAR/LD+ program.
Overview
On April 9, 1996, the Company entered into an agreement to sell
substantially all of its Direct Sales and Services Group,
including its long-distance reseller business and National
Service Center, for $67.4 million to an acquisition company led
by Bain Capital, Inc. The Company believes that under new
ownership, with its increased resources and dedicated focus on
sales and service, the sales and service business will grow
significantly and increase market share. This will benefit both
the Company and the newly-formed Bain company. The Company will
benefit from the equipment sales to the former direct sales
offices. The Company will retain the Healthcare, Call Center
Management ("CCM"), National Accounts and Federal Systems groups,
as well as telephony equipment sales to the independent
distributors, of which the newly-formed Bain company will be the
largest distributor. The Company will use a portion of the
proceeds of the sale to strengthen its balance sheet and pay down
all of its existing bank debt. The effort, management resources
and decisions made in order to finalize a transaction of this
magnitude had a negative impact on the Company's profitability
for the first three months of 1996. Due to the pending nature of
the transaction during the quarter, the Company was unable to
implement a planned restructuring of the direct sales
organization to create a more efficient selling effort and reduce
selling, general and administrative costs until the second
quarter. As a result, selling, general and administrative costs
were approximately $1.5 million higher than they would have been
for the quarter had the restructuring been done at the beginning
of the year. In addition, the Company believes the resources
directed toward the sale of the direct sales organization and the
timing of new installations and moves, adds, and changes ("MAC")
contributed to the decrease in revenue for the quarter compared
to the same period in 1995, as evidenced by the $4.5 million
increase in backlog since the end of 1995. Upon completion of
the sale transaction, the Company's focus will be toward the
third and fourth quarters of the year, at which point it expects
to realize cost savings of approximately $2 million per quarter.
These savings will represent the full impact of the cost-saving
actions in the remaining business and the assumption of certain
overhead costs by the newly-formed Bain company. Management
believes this sale will be good for both companies. The newly-
formed Bain company will be able to focus on sales and service
and the expansion of market share. Executone will benefit from
that expansion through increased product sales and will focus on
product development and retain sales in markets where it believes
it can have a dominant position.
10
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Results of Operations
Revenues for the three-month period ended March 31, 1996 totaled
$67.0 million compared to $70.8 million for the three-month
period ended March 31, 1995. The 5% decrease in revenues was
primarily due to decreases in the level of system upgrades and
expansions in the telephony division and in new installations in
the healthcare division. However, the first quarter is
historically the Company's weakest and most volatile relating to
the timing of new installations. Despite the decline in new
healthcare installations, healthcare bookings for the quarter
were strong and healthcare backlog increased almost $2 million.
Gross profit for the three-month period ended March 31, 1996
decreased $1.8 million over the same period in 1995 primarily due
to the revenue decrease, and the resulting lower absorption of
fixed cost overhead.
The first three months of 1996 generated an operating loss of
$3.5 million compared to operating income of $838,000 for the
same period in 1995. In addition to the impact of the lower
gross profit on operating income, selling, general and
administrative expenses increased almost $2.5 million during the
three-month period ended March 31, 1996 compared to the same
period in 1995. Due to the pending sale of the direct sales
organization during the first quarter, the Company was not able
to implement the planned restructuring of that sales
organization. As a result, the Company believes that there are
approximately $1.5 million in costs that could have been
eliminated in the first three months of 1996 had the
restructuring commenced at the beginning of the year, as planned,
rather than in the second quarter of 1996.
Interest expense for the three-month period ended March 31, 1996
decreased compared to the same period in 1995 primarily due to
lower interest expense resulting from the lower levels of bank
borrowings under the credit facility in the first quarter of 1996
as compared to the same period in 1995.
The Company recorded a $4.9 million provision for loss on the
sale of its inmate calling business and the disposal of the
videoconferencing business (see Subsequent Events).
For the three-month period ended March 31, 1996, the Company
recorded an income tax benefit of $3.6 million which was recorded
as an increase to the deferred tax asset reflecting additional
tax benefits to be utilized in the future. Due to the Company's
substantial remaining tax benefit carryforwards, minimal taxes
will be paid in the near future.
Unistar Acquisition
On December 19, 1995, the Company acquired 100% of the common
stock of Unistar Gaming Corporation ("Unistar"), a privately-held
company that has an exclusive five-year contract to design,
develop, finance, and manage the National Indian Lottery ("NIL").
(See Note F of the Notes to Consolidated Financial Statements for
the terms of the agreement.)
Management believes the Unistar business is a natural extension
of its telephony and call center businesses. Calls via an 800
number will be processed with Interactive Voice Response ("IVR")
equipment or live agents located on the Coeur d'Alene Indian
Tribe of Idaho ("CDA") Reservation using ACD software to process
nationwide wagering activity. The Company has made a significant
equity investment in Unistar, which initially created 8% dilution
to the Company's shareholders and will require possibly up to $2
million to $3 million of cash prior to the resolution of the
pending legal issues discussed below. However, in the opinion of
the Company's management, this investment is justified based upon
the potential returns.
11
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In an attempt to block the NIL, certain states filed letters
under 18 U.S.C. Section 1084 to prevent the long-distance
carriers from providing telephone service to the NIL. The CDA
initiated legal action to compel the long-distance carriers to
provide telephone service to the NIL. The CDA's position is that
the lottery is authorized by the Indian Gaming Regulatory Act
("IGRA") passed by Congress in 1988, that IGRA preempts state and
federal statutes, and that the states lack authority to issue the
Section 1084 notification letters to any carrier. On February 28,
1996, the NIL was ruled lawful by the CDA Tribal Court. The CDA
Tribal Court found that all requirements of IGRA have been
satisfied and that the Section 1084 letters issued by certain
state attorneys general in an effort to interfere with the lawful
operation of the NIL are invalid. In addition, the Court found
that the long-distance carriers cannot refuse to provide the
service requested in the action based upon 18 U.S.C. Section
1084. Any appeal of this ruling must be filed by May 31, 1996.
The Company expects this ruling will be appealed but believes the
CDA's position will be upheld.
Other than legal costs related to an appeal of the CDA Tribal
Court ruling or other actions by the states, if any, the Company
estimates that the additional costs to become operational may
amount to between $5-10 million. The Company expects it will be
able to obtain additional financing for these costs, if
necessary.
The Company believes there is a national market for the NIL based
upon research into the experience of other national lotteries and
the growth of the overall lottery market. However, there is no
assurance that there will be acceptance of a telephone lottery.
Subsequent Events
On April 9, 1996, the Company entered into an agreement to sell
substantially all of the Direct Sales and Services Group,
including its long-distance reseller business and National
Service Center, for $67.4 million to an acquisition company led
by Bain Capital, Inc. (See Note G of the Notes to Consolidated
Financial Statements for the terms of the agreement.) The sale
is expected to close on May 30, 1996, subject to the buyer's
financing and other conditions. The agreement also provides that
the Company and the buyer will enter into a five-year exclusive
distribution agreement under which the buyer will sell and
service the Company's telephony equipment to those businesses and
commercial locations that require up to 400 telephones.
The sale does not include the Pittsburgh direct sales and service
office, which the Company has separately agreed to sell to one of
its existing independent distributors for approximately $1.3
million in cash and notes. The sale of the Direct Sales and
Service Group (including the separate sale of the Pittsburgh
office) relates primarily to the retail distribution channel of
the Computer Telephony division and includes the entire network
services division. After the sale, the Computer Telephony
division will consist of telephony product sales to independent
distributors, of which the newly-formed Bain company will be the
largest distributor, along with the National Accounts and Federal
Systems marketing groups. The Company will retain its Healthcare
Communications and Call Center Management businesses and the
recently acquired Unistar business.
It is currently estimated that the transaction will result in a
pre-tax gain of approximately $40 million. Though the Company
will provide for income taxes at the full statutory rate, the
actual tax liability is expected to approximate $4 million.
After utilizing a significant portion of the Company's deferred
tax asset, the net gain is expected to be approximately $23-25
million. The Company expects to record the gain during the three-
month period ended June 30, 1996, when the transaction will
close.
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The Company expects the sale will ultimately increase its market
share. The new ownership will focus more resources to manage
this business and will be dedicated to growing the sales
distribution channel. Telephony product sales through the
existing independent distributors and through the newly-formed
Bain company will continue to represent a substantial portion of
the Company's revenues. The sale will also allow the Company to
dedicate more of its resources to telephony product development,
particularly relating to the IDS platform, and to the development
and marketing of the Healthcare and CCM product lines.
The termination of the Company's agreement with GPT Video Systems
on April 10, 1996 was a result of GPT's inability to provide a
functioning product according to the originally agreed upon
schedule. As a result, the Company absorbed expenses in 1995 and
in the first three months of 1996 that it is no longer willing to
absorb. The Company is negotiating an agreement to sell the
videoconferencing business. Terms of the contract have yet to be
finalized. The Company recorded a pretax reserve for loss of
$3.9 million during the period.
In April 1997, the Company also sold its inmate calling business
for $0.5 million in cash and notes and recorded a pretax loss of
$1.0 million. This business was a part of the Computer Telephony
division.
Liquidity and Capital Resources
The Company's liquidity is represented by cash, cash equivalents
and cash availability under its existing credit facilities. The
Company's liquidity was approximately $22 million and $23 million
as of
March 31, 1996 and December 31, 1995, respectively.
At March 31, 1996 and December 31, 1995, cash and cash
equivalents amounted to $6.3 million and $8.1 million,
respectively. During the three-month period ended March 31,
1996, the $1.8 million decrease in cash was used to purchase $1.8
million of capital equipment and repay borrowings of $1.0
million, offset by cash generated from operations of $0.8 million
and from other sources of $0.2 million. Cash generated from
operating activities was $0.8 million for the three months ended
March 31, 1996 compared to the use of cash by operations of $9.4
million for the same period in 1995. The improvement is due to
the inventory buildup in late 1994 which was funded in early
1995.
Total debt at March 31, 1996 was $29.8 million, a decrease of
$1.0 million from $30.8 million at December 31, 1995.
As of April 30, 1996, approximately $8.4 million of direct
borrowings was available under the Company's credit facility.
The Company believes that cash flow from operations and the
proceeds to be generated by the pending sale will be sufficient
to meet working capital and other requirements for the next
twelve months.
Forward-Looking Statements
The Company's financial operations before and after the sale on a
comparative basis are very different. There are significant
changes in certain components which should be highlighted.
Based upon the 1995 results of operations, gross profit as a
percentage of revenues was 41.5%. After the sale, gross profit
is expected to be in the 35 to 36% range. Product development
should remain constant in dollars, but due to the lower revenue
base will increase as a percentage of revenues from its current
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level of about 5%, to the 7 to 8% range. SG&A is expected to
show a dramatic decrease after the sale. For 1995, SG&A was
almost 34% of revenues. After the sale, it is expected to
decline into the 19 to 20% range. The decrease will be a result
of the elimination of the large direct sales force and
streamlining of G&A expenses. Operating income, excluding the
provision for restructuring, was 2.6% of revenues for 1995.
After the sale, it is expected to be in the 8 to 10% range.
Revenues are expected to be in the $45 to $47 million range for
the third quarter of 1996 and in the $47 to $49 million range for
the fourth quarter of 1996.
The forward-looking statements regarding estimated results for
the periods after the sale are based on several assumptions: (1)
the closing of the sale to Bain in the second quarter of 1996,
resulting in no network or direct telephony revenue or earnings
in the third or fourth quarter of 1996; (2) growth in OEM sales
of telephony product pursuant to the distribution agreement with
the new Bain company and other OEM telephony shipments of 5% over
1995 OEM sales volume; (3) growth in call center management
sales, from $3.7 million for the third and fourth quarters of
1995 combined to $8.7 million for the same quarters in 1996; (4)
growth of approximately 22% in healthcare communications sales,
from $14.6 million in the last two quarters of 1995 to $17.9
million for the same period in 1996; (5) projected reductions in
corporate expenses resulting from the sale of the direct sales
and service and network businesses of approximately $2.0 million
for the third and fourth quarters of 1996 combined and additional
overhead reductions of $2.5 million for the third and fourth
quarters of 1996 combined; (6) an increase for the six-month
period in 1996 of 26% over 1995 in the Company's National
Accounts and Federal Systems revenues; and (7) no
videoconferencing revenues or expenses and no charges in the
third or fourth quarter of 1996 relating to the exiting or sale
of businesses and no significant increases in product
manufacturing costs.
The Company's forward-looking statements regarding estimates of
the proforma results for the periods after the sale should be
evaluated with the level of caution appropriate at a time when
the transaction and proposed restructuring cost savings have not
yet been effected.
If actual events differ materially from the Company's
assumptions, projections and estimates, or if the sale does not
occur as planned, the Company's actual results could vary
significantly from the performance projected in the forward-
looking statements. Additional information is contained in a
Report on Form 8-K filed with the SEC on May 1, 1996 relating to
the Company's forward-looking statements.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
11 - Statement Regarding Computation of Per Share Earnings
b) Reports on Form 8-K
On January 3, 1996, the Company filed a Current Report on
Form 8-K reporting the acquisition of Unistar Gaming
Corporation on December 19, 1995.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
EXECUTONE Information Systems, Inc.
Dated: February 18, 1997 /s/ Alan Kessman
Alan Kessman
Chairman, President and
Chief Executive Officer
Dated: February 18, 1997 /s/ Anthony R. Guarascio
Anthony R. Guarascio
Vice President Finance and
Chief Financial Officer
16
<TABLE>
<CAPTION>
EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
NET INCOME (LOSS) $ (5,358,000) $ 120,000
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 51,853,000 45,947,000
COMMON STOCK EQUIVALENT SHARES
ASSUMED TO BE ISSUED FOR DILUTIVE
STOCK OPTIONS AND WARRANTS --- 2,891,000
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 51,853,000 48,838,000
EARNINGS (LOSS) PER COMMON SHARE $ (0.10) $ 0.00
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANTS FILING ON FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,278
<SECURITIES> 0
<RECEIVABLES> 44,657
<ALLOWANCES> 1,366
<INVENTORY> 35,399
<CURRENT-ASSETS> 87,209
<PP&E> 47,638
<DEPRECIATION> 31,116
<TOTAL-ASSETS> 161,545
<CURRENT-LIABILITIES> 70,094
<BONDS> 28,879
<COMMON> 519
0
7,300
<OTHER-SE> 51,973
<TOTAL-LIABILITY-AND-EQUITY> 161,545
<SALES> 66,966
<TOTAL-REVENUES> 66,966
<CGS> 40,446
<TOTAL-COSTS> 40,446
<OTHER-EXPENSES> 30,020
<LOSS-PROVISION> 224
<INTEREST-EXPENSE> 808
<INCOME-PRETAX> (8,969)
<INCOME-TAX> (3,611)
<INCOME-CONTINUING> (5,358)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,358)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
